The Effects of Stock Lending on Security Prices: An Experiment

ABSTRACT

We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous
money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high loan fee stocks in
the manager's portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in
two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent, and the second,
from June 5 to September 30, 2009, with over $250 million of securities lent. While the supply shocks significantly reduce
market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid–ask spreads are affected.
The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices
from securities lending.